Wellington Management's Mike Trihy - going long on evergreen funds: AGM Live from SuperReturn

0:00We're going mainstream.

0:02Mike Trihy: Hi, I'm Michael Sijmore, founder of Alco's Mainstream and co-founder of Broadhaven Ventures. We are live here in Berlin at Super Return for Alco's Mainstream Live. I'm here with Mike Trihy, head of Evergreen Portfolio Management at Wellington Management. The$1.3 trillion asset manager that sits at the intersection of public and private. We're going to get into all that. And I think you're very emblematic of that convergence of public and private, particularly as private companies stay private longer. There's a lot to talk about there, but first, would love to get into your background. I think that is so instructive to evolution of private markets and how the evergreen space is evolving.

0:41Mike Trihy: You're at Partners, you're at Bow River, now you're at Wellington. Take us through that journey and how have evergreens evolved as your career has evolved? Yeah, it's been quite a journey. I've been in the evergreen space now for nearly a decade. And I think what I'm working on now at Wellington is almost kind of a perfect synthesis of everything that I've learned at all of my prior shops in the evergreen space. And starting out at Partners Group was a great experience in running scaled evergreen funds, working with large platforms, and learning how to put up compelling rates of return over longer timeframes in an evergreen structure, and really learned a lot while I was there.

1:18Bow River was almost the opposite. We were a scrappy startup. I think we started with a team of two within a broader asset manager. And that was effectively doing a little bit of everything building that fund. So I got to learn a lot about ops and fundraising and all the more complex aspects of running an evergreen strategy. And over that period of time, I got to see massive change in the evergreen landscape. You went from five or six funds in North America, for example, to now probably hundreds. I don't even know what the number is anymore. And it's great to see the explosion of growth in the space, but it's led to, I think, a lot of change and a lot of evolution into more narrow strategies, evolution into single manager strategies, and really just a whole breadth of solutions for clients.

1:58So in many ways, I think it's the perfect firm at the perfect point in time and the right kind of confluence for my skill set from what I've worked on in the past. So I want to unpack the word perfect,

2:08Mike Trihy: because I think that gets into evergreens from a structural perspective. You have such an interesting purview having been at different types of firms with different types of platforms. What do you think a perfect evergreen structure is in your mind? Kind of think about ingredients as it's related to evergreens. What do you put into the pot? I think what it takes for success in building an evergreen fund is fundamentally totally different than success in drawdown funds. It's a very different structure and the ingredients for success, I think, are wildly, wildly different. And I'm seeing a lot of that come to fruition from my past roles, but also at Wellington as well, where I think there's this thought that, okay, if a firm has a great track record bottom up on deals, they can then go repackage that and do it in an evergreen structure and have success.

2:57I've seen that that's, you know, deal flow is important. Deal quality is important. It's probably the smaller contributor to returns overall relative to portfolio construction and overall ability to have enough deal flow to keep an evergreen fed. And most importantly, have a fundraising plan, have an ability to handle liquidity stress. All of that requires as a business with just a totally different operational framework and way of thinking about things. One, you're going to have much more of a focus on cashflow planning, top-down investment expertise versus just bottom-up. You still need the bottom-up sourcing.

3:29You still need the deal engine. It becomes less important in an evergreen structure. You also need really rock-solid operations. Valuations are quite a bit more important in an evergreen than they are. It's not like they're unimportant in drawdowns, but you don't have people actively trading in and out at those values. So much more important in an evergreen context. And then you think about the sales organization, the go-to-market. You don't have control over when flows come in. You need to have a really close connection between the investment side of the business and the sales side of the operation to be able to forecast flows, plan flows effectively, and make sure you have deal flow to match that.

4:03Not every firm is equipped to deal with that level of complexity, not to mention the regulatory aspects, structuring. It is a totally different beast. And so I think success in the evergreen space requires really strong operations, really strong sales team with the right fiduciary mindset that's focused on protecting returns first, not just growing AUM, because there's a direct link between managed growth and having a plan around fundraising and how you end up actually putting up returns in an evergreen structure. So that's a lot of different aspects coming together. But really, if you can nail those aspects, to me, far more important than like, oh, I have the best deals in the market that will have an impact on an evergreen fund.

4:41It's to me secondary versus these broader aspects that are so crucial for success.

4:45Mike Trihy: You think many firms have all those capabilities as it relates to having an evergreen or they may have some but not others? And where I'm kind of going with that question is like the private markets, market structure is evolving. There are large managers that have scaled platforms and obviously they have the ability to source deals. They have the ability to distribute and educate the wealth channel. you have small managers who may find interesting deals, but may not have the size and scale to have enough deals to feed an evergreen engine. How do you think about those nuances of evergreens? I think that gets at a really interesting question as you think about the evolution of the space, because I don't want to make the argument that you have to be a massive scaled player to be successful.

5:29I think there's, to your point, there are very few firms, I think, that check all of the boxes I was just getting to. There are firms out there certainly that do it. it's not necessary to have every one of those boxes but you have to have enough of them covered i think to be successful i think there's a subset of firms that have kind of like as i hinted at before this really good bottom-up track record don't have a lot of the other ingredients at all but think that can translate to wealth and evergreen and that's where i think it's really difficult i think there's a lot of firms that cover enough of the bases to make it work and obviously large firms have all the coverage you need all of that but i think sometimes they're lacking in some of the nuance on cash flow planning and things like that but that can be learned over time.

6:05You can have some success and then realize like, oh, we need to have more of a plan here and then put that into place. On the smaller firm side, I think a lot of the smaller firms are, if they're humble enough, they're able to learn some of this stuff on the fly and be a little bit more agile than the larger ones. The toughest thing is the deal flow aspect, being able to keep a fund like this fed. Because I think if you're a firm that executes four buyout deals a year, you have a very hard time building a diversified evergreen platform. And I think that's just a really tough road to go down. So it totally depends on your approach.

6:32If you're a mini boutique with four or five different strategies and a lot of flow, that can work super well. If you're a super narrow single sector GP that does four deals a year, that's a lot harder to make work in Evergreen. So should there be less Evergreens or more? That's a really complex question. I'm going to say both. So that's a cheat of an answer, but I'll get into why I think that is. I think near term, there needs to be probably a little bit less. I think there's been this flood to the market. And I think we're at this point where it's a little bit of, I think, a turning point for the industry where there's much more of a focus on, I think, the things that matter in evergreen portfolio construction.

7:12And I think that's going to lead to more winners and losers. In the past, there's been this kind of rising tide lifts all boats thing where it's like, oh, wow, there's a lot of money to be raised in wealth. They're genuinely under allocated here. So this flood of product comes online and it's very hard for advisors to discern quality from not. There's different levels of disclosure, different levels of marketing. So I think it's very difficult to say, OK, this is what I think a quality fund looks like versus not. There's just this flood of product and everyone's been able to raise money effectively for the most part.

7:39Now that you're seeing dispersion in returns, dispersion in fundraising, you're starting to see a little bit of the shakeout occur. And I think that's net really good for the ecosystem over time. And I think that's going to lead to actually growth in more evergreen funds in the future. But my hope is that it's more measured and with a focus on quality versus just we need to do something in wealth. let's get something out there. It's like, let's do this the right way. Think about building the right ingredients, the right teams. And as these skillsets start to spread, I think that's going to happen more and more in the market.

8:07Do you think that there's a decidedly best structure

8:11Mike Trihy: for evergreens? So I think there's no single best structure, but there are the right structures for the right assets for the right clients. You have to match those three things in the right way to be effective in wealth. And that means there's a lot of different structures. I'll use the US for an example. If you're going to go down market in an interval fund structure, like the trades on a ticker and is very readily available, that can make sense if you have an underlying asset class with the right liquidity characteristics and the right mix of distribution patterns and things that can match the liquidity that's required and have the right level of education on that client base to understand what you're investing in.

8:52So what that means is for certain asset classes, it makes a lot of sense. For others, it maybe doesn't make sense at all. And then I think that's why you've seen, for example, buyout oriented strategies move more towards tender offer funds, or now you've seen the growth of 34 act funds, which are even more restrictive. And these trade and look a lot more like traditional private funds. They're usually sold up market to larger clients. That makes sense because you're kind of matching the complexity, the sophistication, the liquidity, all of that matches the structure and matches the client. Where I think doesn't necessarily make sense is when you have underlying asset classes that do not match a structure or the client base.

9:26For example, if you're going to put a venture fund in an interval fund wrapper and go out to non-accredited investors or something like that, to me, that seems like there's a clear liquidity mismatch and a clear expertise mismatch and risk mismatch there. Whereas other structures can make perfect sense. There's no best structure. It's all about matching those three components. How do you think about LP composition within an Evergreen?

9:47Mike Trihy: And you've seen this at partners group as well with the evolution of both Evergreen product and the evolution of investors in that Evergreen product. Should institutional and wealth LPs have completely separate Evergreen products? Or is it good to mix LPs? Because they may have different needs, redemption timing, all of those things for various different reasons. But how do you think about that as a GP? And how do you think LPs think about that? From a GP perspective, I've always leaned towards the more diversification, the better in an evergreen structure. If you have all one investor type in a portfolio, you're so much more likely to see kind of hurting behavior.

10:29And from an LP perspective, I don't think this was thought about as much in the past, but I think in recent years, it's started to come up a lot more. I've noticed in discussions with investors, there's a lot more scrutiny around, hey, do you have big concentration with a specific bank or with a specific investor type? That can drive behavior of other investors now. Now, I think, though, if you have the right product that can appeal to multiple types of investors, that's your dream sweet spot. Because if you can have a nice mix of more sophisticated, larger RIAs mixed with banks, mixed with institutions, those pools of capital are likely to behave a little bit different to the point you were making.

11:02They may have different liquidity timelines. They may have different periods when they're under stress. I think about the great example of 2022. Institutions have the denominator effect. They're over allocated to PE. So you actually saw higher rates of redemption pressure from those, whereas at the same time, wealth was growing like crazy and you had tons of demand. So if you can balance that, it creates a lot more stability in your overall flows and your overall ability to be resilient through cycles. I think where you get into trouble is big single client concentration and even single investor type concentration.

11:32If you can avoid it, that's probably better.

11:33Mike Trihy: Do you think that evergreens will be the product structure of choice relative to drawdowns going forward? And five or 10 years time, we'll see evergreens be the core way in which investors allocate, institutional or wealth allocate to private markets as opposed to drawdowns? I don't think evergreens will ever be the core on the institutional side. I think they will be the core on the wealth side. I think there's so many tailwinds there and so many reasons that it just makes sense for the wealth channel, especially as you start to move into more model solutions and other things in the market. Like Evergreen just works so much better.

12:09And I think it captures, you're not going to get the same level of alpha you could picking a single manager, single strategy fund. But I don't think wealth clients are particularly well equipped to make those kinds of selections. I think there's a lot of, you can pick individual funds, but your odds of generating like a really compelling diversified portfolio that way are pretty slim in the wealth channels. I think they're much better suited to these more diversified products. I think the lack of capital calls and everything is just way better suited. The tax treatment is way better suited. All those things combined create, I think, enough tailwinds that it's still the product of choice in wealth.

12:39I think in institutional, you're going to see a bifurcation depending on size. I think the larger end of institutional, if you can run the cashflow matching program to stay 10 % PE across your 50 different drawdown fund families and do all that cashflow planning, there's really no need for an evergreen. You're doing effectively what an evergreen could do with your own internal team. If you're a mid or small sized endowment, for example, or someone who's trying to build to a certain target allocation, and if you only have 10 million to invest, probably not suited to go out and try to pick bullet fund interest there.

13:11That's where I think evergreens are growing as a solution, is this smaller end of institutional to reach target allocations, or even as a sole allocation for many at a certain scale on the small end of institutional.

13:20Mike Trihy: Do you think that a firm with public markets DNA is the right type of fit to manage and run an evergreen front from all the structural aspects? As I'm listening to you talk, there's so many different nuances to this and what it takes to manage and run an evergreen. Where does the public markets DNA come into play as it relates to managing an evergreen? I do think there's areas of distinct advantage, but you have to have the right other ingredients alongside it. The obvious thing is ability to manage product that goes into the wealth channel. If you're a liquid manager, you have been doing that for a very long time.

13:56You know how to manage all the complexity, all the tax aspects, all the distribution. That side, there's so much less brain damage there. And then you think about things as simple as managing a liquidity bucket in an evergreen. If you're not a public markets manager, that's kind of hard to do for most managers. You're probably going to have to outsource that, or you're gonna have to come up with some other kind of solution or just keep it in cash. If you're within a larger liquid markets manager, you can come up with many creative solutions there. You have whole teams that can work on those aspects.

14:20So I think a lot of the aspects of evergreen fund management make perfect sense in a firm that has that kind of public markets DNA. The area that you need to make sure you have covered too is it's not like the deal flow and private markets arm is not relevant. It's so relevant to generating performance. You need to have especially diversified deal flow. And so that's the aspect of you need a public markets firm that has a private markets arm with a broad enough set of strategies and enough deal flow to also support an evergreen. And that's kind of the sweet spot that narrows the field quite a bit, because you can't just have all that structuring and operational expertise.

14:52You need all the private markets flow, all that aspect too. So it's hard to nail that combo.

14:56Mike Trihy: I think that's a perfect segue to two things. One is partnerships to fit the piece of the puzzle together. And two is this intersection between public and private, which you're in the center of in a number of ways. So on the partnership side, you recently partnered with Vanguard and Blackstone on a product, a multi-manager product. How do you think about, not just specific to this product, but I mentioned it because it's of note in the industry in terms of where things are going, build buyer partner as it relates to evergreen structures or products created for the Wealth Channel? I think the answer is all three.

15:35And again, it depends on your core competencies. If you're a massive scaled private markets manager, for example, you're probably not going to want to build out a liquid arm. That's something where a partnership makes sense. If you're a more narrow GP who wants to broaden the set of things that you can invest in and then use that to create wealth product, maybe that's through acquisitions. That's why you've seen so many firms go from single manager strategies to more diverse sets of kind of different asset classes, things like that under one hood. So I think you can see different outcomes for different managers.

16:03And I think in the case of what we were working on at Wellington with Blackstone and Vanguard, I think it was a great case of leaning into your strengths. And I think that's the advantage of partnership is, yes, you can try to bolt things on and add things and grow things organically. But at a certain point, there are certain things that you just have to admit other firms are going to have a superior edge in. And if you let firms focus on the areas they're best at and build product around that, That's where partnerships can be super compelling in this space, I think.

16:28Mike Trihy: So I want to make sure we touch on what's going on in private markets that's now going public. Because I think that's instructive to so many reasons why you're also thinking heavily about venture and growth, which is an area you focus on. So there's some very large IPOs that are happening. Much of the value has been created in private markets. Now, these businesses will go public at very large valuations or market cap. How do you think about that market structure evolution? And what does it mean for the wealth investor in terms of where, as a firm that does both public and private, where should investors get access and why?

17:07I do think the scale of IPOs that seem to be coming down the pipe definitely is just another indicator of how long you can stay private today without needing to rely on public markets. It's been discussed to death, but the stay private longer thing has reached a pretty remarkable place when you can look at the scale of IPOs that are coming to market relative to anything in history. And that's been enabled by this just growth of the private markets ecosystem. And I think that sets up there's clear importance for if you're looking at building a portfolio and you're focused just on public markets, you really are increasingly focused on just larger and larger names.

17:42You see it in index construction. That's only going to get worse with these large IPOs. there's more and more of a skew towards just the big get bigger. That doesn't mean there's not going to be returns there. I think public markets have continued to perform very well. There's going to be periods where they've outperformed privates. Now the growth of evergreens even allows longer hold periods potentially on some assets and has another liquidity provider through direct secondaries. All these things come together in a way that I think really sets up the potential for continued long holds. But then the flip side argument to that is if you see success in some mega IPOs coming up, these have tended to be periods where it's almost a halo effect, where that leads to a bunch of other companies then running for the IPO exit.

18:18And I don't think you're going to see that happening at early stage companies by any stretch. It will probably still be companies that are more mature, but it can open up a little bit of that. Maybe companies will start to take advantage and go public and generate liquidity that way.

18:29Mike Trihy: How do you think about the market structure of what's going to likely happen with these very large IPOs? What does that mean for private markets in your view? So these companies go public. They obviously change the market structure on public markets. They'll probably rejigrate the index at some point in time. What does that do? And what's the trickle-down effect of private markets in your view? I actually think it's more interesting to think about what it means for private markets because this is all happening in the context of an asset class that has been pretty starved for DPI for years. Obviously, 21 was massive DPI.

19:04You saw this huge correction. And there have been green shoots in the years since. I think exit volume has been ticking up kind of steadily every year. I think last year was actually kind of more in line with like 18, 19. So sort of back to normalize, but again, relative to much more nav out there as a percentage distribution yield, it's still way, way down. And the composition of that had pivoted from IPOs as the primary exit to way more things like direct secondary and tenders and all these other things. So true, full organic exits via IPO were still pretty limited. Now you're going to see this moment in time where the scale of some of these exits could actually impact DPI statistics across the private markets ecosystem.

19:39They're large enough and held across multiple vintages of funds, multiple strategies. When you think about that trickling through from an exit perspective, you could see maybe the biggest swing in DPI stats across the entire ecosystem that's maybe ever happened. And the amount of capital that that could free up and potentially lead to reinvestment. This has been kind of this stagnant period of fundraising, as everyone's talked about for years and drawdown funds in many of these pockets. Even if you say, okay, there's really, maybe there's no increase in IPO activity around that. The scale of what's coming to market could be enough to really drive material increase in fundraising and redeployment as you see this major skew in DPI.

20:16Mike Trihy: What about the relative value of public versus private though? And you can play both sides of that given your footprint on the public side and what you've built on the private side. How do you think about that relative value between public markets, valuations, and companies? And I guess it's obviously company specific. We'll stay more general for the context of this conversation, but relative to private markets assets, which again, some may go public and then be interesting to see what happens. Yeah. I mean, it's interesting on the private side. It's so dependent on where you look in the market.

20:50I think across many segments of privates, valuations are still depressed coming off of like 21, 22. If we stick to looking at the growth and venture segment of the market, you had this massive reset in valuations. and then really for many segments of the growth market for example things never recover consumer and parts of fintech have been really a pretty low multiples on revenue for years now and have not seen much in the way of a material recovery and yet if you look at other pockets ai and other areas you see massive exuberance and and really strong growth in valuations to where it's been remarkable what you're seeing in some especially the early stages like the levels of valuation that really you've never seen before you compare that with the public markets and i think it's a similar story there where there's pockets of clearly extreme exuberance.

21:32You're seeing, again, similar themes. Anything tangentially AI related has just a ton of tailwinds and is pushing valuations up. And again, I think there's a lot of debate. We have this even internally at Wellington around how the attractiveness of those valuations. And there are many who think they're more than justified. There are many who think that this is very elevated versus history. And there's been historical bubbles that have looked like this. So it's very hard to predict how that pocket works. But similarly, there are large parts of the market that appear extremely attractively valued today.

21:59So I think it's very much a sector-specific, strategy-specific thing. I think it's hard to look at public or private and say one's over, one's undervalued. I think you're seeing very similar dynamics in each where there's pockets of very strong exuberance, high valuations, pockets where things are relatively undervalued, it seems like.

22:16Mike Trihy: So great segue to the final question to wrap up. What is something that you think is going to happen faster than we might expect in the Wealth Channel? And what's something that's going to happen slower. I think you're going to see a much slower response to kind of the liquidity pressure and the headline risk we're seeing in the market today versus what many expect. I think these types of issues, when you see pockets of kind of redemption pressure within different funds and things like that, I think these things tend to take a material amount of time to resolve. Like right now, it seems like there's this panic.

22:53Everyone's rushing for the exit. If you read the headlines. In practice, funds are doing what they were designed to do, they gate. And that leads to this being prolonged. If you remember a few years ago, there was some of the real estate gating issues and many of that went on for three, four, five years. So I think what's actually going to happen faster than people expect that is probably directionally tied to this is the headlines are probably actually going to fall away maybe a little faster than people expect. I think another couple quarters of effectively reporting on the same dynamic and not much changing probably is going to result in maybe this getting out of the news flow as the core headline relatively fast.

23:26I think in this space, you see a lot of sort of cyclicality of inflows and outflows where some pockets are in very hot demand. Other pockets are kind of out of favor. You're almost seeing a rotation right now where it seems like real estate is kind of at the other end of that J curve. It had a few years of just brutal outflows, kind of bottomed, and now it actually seems like there's some strong green shoots in terms of wealth flows really starting to build there again. And on the flip side, you're seeing credit right in the crosshairs right now and really strong outflows. And I expect probably a similar dynamic of likely a few years of tough times.

23:55And then probably at some point you're going to see that have some green shoots and come back out of it as well. So I guess just the nature of the asset class and you tend to see these things. The time aspect makes it very hard to keep it the core headline for a really extended period of time.

24:08Mike Trihy: Well, for a firm that's 100 years old, it's been through both fast cycles and slow cycles. And I think that is such a great way to wrap up this conversation and kind of encapsulate what Wellington has done and does on the public side, but also what it's doing quickly but methodically on the private side. So, Mike, it's a great conversation. Thanks so much. Thanks so much, Michael. Great talking with you.

24:37Mike Trihy: We're going mainstream.